Wednesday, November 26, 2014

This week I had the pleasure of joining a panel on retail payments innovation as a part of a seminar by van Doorne and Innopay on the Payment Services Directive and the future changes for the payment industry. Panel chair Gijs Boudewijn challenged me to formulate some thoughts on the future direction of retail payments. I answered that the best place to look would be in places and via perspectives that we could be overlooking right now.

1. Is it access to the account or a traceable id that matters?
There is a lot of discussion on the text of the second Payment Services Directive and on the legal and technical mechanisms that are required to make access to the account work. Due to their origin, these discussions are quite bank centric and the implementation issues surrounding this topic will drain a lot of resources of many players involved.

While being busy with this PSD2 issue, we may overlook the fact that all one really needs is a simple chip-id. In the Netherlands for example, one could use the chip-id of public transport ticket issuer TLS as a basis for use in hip and new proprietary retailer/consumer applications. These would combine the chip-id with an intelligent voucher/billing/customer system that utilises SEPA-direct debits in the back-end. It would provide a smooth customer and retailer experience while the bank only sees regular transactions.

My proposition here is that if we're all looking towards access to the account as the hot spot for innovation, we may be looking in the wrong direction. It might be more about the traceable id.

2. The retailers have landed in an interesting position
In his tomorrows transactions blog Dave Birch referred to an analysis by Peter Jones from PSE on the impact of the interchange fee regulation, published in the Journal for Payments Strategy and Systems. The main conclusion of it was that financially the retailers are the winners by getting a cap on their fees. I agree with that and would be inclined to broaden this perspective.

By tradition banks were the players with the monopoly on payments technology and security knowledge. Even in the 1980s, the collective of retailers in the Netherlands had done a feasibility study to set up their own Point of Sale system. This showed they could set it up for € 5 million euro but they didn't want to take the risk of it failing. So they left it to the banks (to complain about high fees later).

Since that time, the knowledge on processing and payments has become available to a wide range of players, to the extend that banks are now lagging in expertise and capability (while being locked into old technology solutions). The consequence is that retailers will be well able to develop or use in-house apps, customer relation services and payment mechanisms that use the bank infrastructure, without being subject to the rules of the Payment Services Directive.

The main development is therefore that the obliged intermediary role of banks in providing payment mechanisms is gone and will erode. Retailers can regain their customer relationship by themselves or in cooperation with any other ICT-provider that allows them to identify the customer and provide a processing infrastructure. Some interesting innovations can therefore be expected at the outer boundaries of the PSD, as a consequence of the possible exemptions.

I expect both physical and e-retailers to use the non-bank, non-payment space that the PSD defines to achieve exactly what they're after: increased customer retention, increased conversion and a smooth payment experience. Bottom line: we might better be looking outside of the PSD to see innovation in action.

3. On ledgers and tokens
As a final thought I would encourage everyone to try a different mindset for the developments that we are witnessing. Because in essence, anything that happens (in payments/retail) boils down to either tokens (coins, notes, points) or ledgers (private or public). Now let's see what happens if we apply this framework.

We might then appreciate the bitcoin emergence as an innovation in the area of collective ledger provision with distributed trust. We could reposition Linked-In as a privately owned, open and self-administered ledger, that logs individuals achievements that are relevant in the work domain. The same would hold for Facebook and many other e-commerce companies. We would call banks the keepers of the trusted and well protected financial ledgers and would also note that in the public domain, a whole range of ledgers are being interconnected for the sake of security, anti-fraud measures etc.

We could also look at the world of tokens, in its many variations. Tokens of shopping behaviour (saving points), tokens of access (tickets), tokens from government (coins and banknotes), tokens of appreciations (awards, prizes) and tokens that prove identity or personal characteristics. Some of those tokens might be valuable and lead to a change of some of the ledgers, while others would have a role in their own right (voucher for a free coffee).

While it is clear that there are quite a few interesting new developments in the ledger-space, could it be that it is the token-domain where the true action is going to be ?

Payments as an afterthought
In sum: the non-bank, identity-based, non-regulated commercial domain might well be the area where we can see innovations that show us how today's technology can be made to work best so that payments become the afterthought that they are.